RMS economic exposure data shows risk transfer potential in Asia

One of the world’s leading catastrophe risk modelling firm’s, RMS, has announced the release of a new Economic Exposure Database and Industrial Clusters Catalogs for the Philippines, South Korea, Taiwan, Thailand and Vietnam.
The new database will enable insurers, reinsurers and insurance-linked securities (ILS) managers or specialists to understand and develop a much more comprehensive view of risk across Asia, which is achieved by a set of exposure databases that provide location, configuration and economic values of exposure concentrations throughout the five countries. As a whole, Asia is exposed to a variety of catastrophic events, in particular along its coast line where cities are extremely vulnerable to flooding caused by typhoons and tsunamis.

The new datasets provided by RMS show just how exposed these five Asian countries really are by providing figures for residential, industrial and commercial economic exposure. The capital of each country, so Bangkok, National Capital Region, Seoul, Taipei City and Hanoi have a combined commercial economic exposure of $562 billion, $99 billion for industrial exposure and $948 billion of residential economic exposure.

With such high economic exposure across the board, coupled with a high number of uninsured, low insurance penetration across both personal and commercial and an increase in catastrophe exposure due to clusters of industrial parks in areas exposed to multiple perils, there’s a clear opportunity to grow coverage in these regions.

Neena Saith, Director of Business Solutions at RMS said; “Ulsan, South Korea, is an industrial exposure hotspot that is highly vulnerable to typhoons. The industrial centre has $56 billion of industrial exposure and insurance penetration is increasing. On the west coast of Taiwan, which is exposed to tsunamis from the rupture of the Manila Arc, the Linhai Industrial Park in Kaohsiung has $5.5 billion of industrial exposure.”

The increasing amount of exposure provides an opportunity for the catastrophe bond and insurance-linked securities (ILS) market to aid in narrowing the gap between economic and insured losses across Asia. As many of the regions with high exposures still don’t have coverage, the gap between economic and insured losses will only increase with a greater frequency of natural disasters and more rapid development.

ILS and cat bonds could also provide contingent catastrophe risk financing for these industrial and commercial zones, even without high-levels of insurance penetration. There is no reason that governments, local councils, large corporates or even consortia of corporations, could not use catastrophe bonds, parametric triggers and other derivative type tools to transfer their financial exposure to catastrophes to capital market investors.

The new RMS datasets also reveal the impact of the Asia-wide industrial cluster policy, and how this has changed the risk composition as some of the more developed cities have relocated industrial zones away from commercial and residential ones. The Economic Exposure datasets for Asia can also be used in sync with companies’ previous exposure heat maps, enabling firms to see areas where they are currently under or over-exposed.

Speaking about the new database Saith said; “Until now, the scarcity of exposure data for Asia has forced companies to rely on aggregate data, which hides the true magnitude of their risk. By using RMS datasets companies can now get a clear-cut view of exposure risk to sustain profitable business in these five countries. They can locate concentrations of exposure and characterize the risk profiles of exposure hotspots to develop more robust risk management strategies.”

The amount of exposure in Asia is staggering, especially when you consider how low insurance and reinsurance penetration is in the region. Corporations operating in these industrial and commercial clusters are often carrying a huge amount of catastrophe risk exposure on their balance-sheet, with no risk transfer protection in place.

Providing contingent catastrophe risk financing to protect corporations against these kinds of exposure is well within the remit of the catastrophe bond and ILS market and its capital market investors. A step outside of the world of insurable interest would seem the best way to serve those who are holding these enormous exposures with little to no financial protection.